Gov. Peter Shumlin discusses new TIF district rules at a news conference Wednesday.
Shumlin says he wants to forgive about $6 million that the state auditor last year said several Vermont cities and towns owe the state in connection with special tax districts designed to promote economic development. Shumlin said his administration will introduce legislation shortly that would clarify the rules governing so-called tax increment financing districts.

WINOOSKI — Gov. Peter Shumlin said Wednesday he wants to “wipe the slate clean” on about $6 million that a former state auditor said three Vermont cities and a town owe the state in connection with special tax districts designed to promote economic development.

Shumlin said the goals of legislation now being drafted would be to forgive the debts that then-state Auditor Tom Salmon said last year were owed by Milton, Burlington, Winooski and Newport to the state education fund. Shumlin said the legislation would clarify the law governing the districts so similar disputes don’t arise in the future.

The municipalities dispute Salmon’s finding.

Shumlin was joined by several mayors and other local officials as he announced the legislation outside a major downtown Winooski redevelopment project.

Two systems are in play on the front line of state and municipal finances in the tiff over TIFs — or tax-increment financing districts.

One of the two is the statewide property tax Vermont uses to fund its public schools. The tax was created in the late 1990s and tweaked about a decade ago to address a historic complaint that some towns — those with ski resorts or big manufacturing plants — had an easier time raising money from property taxes for schools than those where taxpayers were mainly private homeowners.

Meanwhile, the TIF program allowed communities meeting certain criteria to create the TIF districts, the downtown redevelopment zones where bonds are issued for things like new streets and other infrastructure improvements and paid off by diverting some of the property taxes collected in the community.

Officials said a natural tension exists between the two systems: More money going to pay off TIF bonds means less going to the state education fund.

A key finding in Salmon’s report was that municipalities “retained several million dollars in incremental property tax revenue that should have been paid to the state’s education fund.”

Some of the findings related to the starting date, and what counted as the starting values, for properties about to undergo big improvements. If initial values of downtown properties were underestimated, Salmon said, there would be more “new” revenue generated after the properties were improved — and it was that “new” revenue that could be diverted from going to the state education fund.

In Milton’s case — and Milton accounted for $3.4 million of the nearly $6 million Salmon said was owed — Town Manager Brian Palaia said the auditor’s complaint was that the town paid cash for $2.8 million in improvements instead of borrowing the money through a bond issue.

“We paid directly costs to a vendor for an eligible TIF project instead of borrowing the money,” Palaia said, adding that the decision saved $600,000 in interest costs that would have been paid by the state.

Burlington drew criticism from Salmon for using TIF funding to refinance a project on the city’s Lake Champlain waterfront that was originally financed in 1991 — four years before Vermont passed its first law allowing TIFs.

Shumlin and the local officials agreed that despite the disputes, the TIF program should continue.

Steve Jeffrey, executive director of the Vermont League of Cities and Towns, said the programs had “given municipalities in the state of Vermont the answer to the chicken-and-egg problem of economic development. We can have economic development if only we had the public infrastructure and public investment that we need to be able to serve those new businesses. But without the tax base to do it, we can’t get the public infrastructure built.

“So this allows us to be able to make that public infrastructure available, without burdening the general taxpayer,” Jeffrey added.